Tax threat to private equity? Not so fast.

NEW YORK (CNNMoney.com) -- The tax man is sniffing around private equity, the latest sign of the public scrutiny growing around the industry.

The private equity industry has been buzzing with talk of a proposal that would change the way "carried interest" - the usually 20 percent cut private equity firms take when the funds they manage make a profit - is taxed.

The proposal reportedly being floated by Senator Charles Grassley (R-IA) would call for carried interest to be taxed as ordinary income rather than as long-term capital gains. That would increase the tax rate on these gains from the current 15 percent to as high as 35 percent.

Such a move would be a blow for private equity, but legal experts said such a proposal would have to be skillfully crafted in order to not have unintended consequences on a wide range of business partnerships.

Grassley's office did not return calls seeking comment.

Although private equity professionals receive a salary, the bulk of their compensation comes from carry. (Not sure exactly what private equity firms do? Watch a video that explains the industry - 3:38)

Blackstone CEO Stephen Schwarzman, whose company has filed for a $4 billion initial public offering, will only receive $350,000 in salary when the firm goes public, but he will own a significant portion of the carried interest earned from the firm's funds, according to the company's prospectus.

As private equity's power brokers have moved deeper into the public spotlight, the wealth generated from carried interest has come to the attention of tax authorities.

"Private equity is an easy target because they are so rich," said Peter Baumbusch, a partner with Gibson Dunn's Tax practice who works with the private equity sector.

While political pressure on the industry may be growing, it will be difficult to create legislation that doesn't have consequences on other investment vehicles, legal experts said.

"The idea of private equity as some kind of narrow entity you could legislate so as to just touch it and not muck up all sorts of investment vehicles and other structures is absurd," said Bob Profusek, M&A co-practice leader at law firm Jones Day.

Carried interest arrangements aren't only common in private equity funds but in real estate and hedge funds as well. If such a carried interest tax proposal spilled over to these other industries, it would likely face strong opposition from a variety of fronts, experts said.

Hedge funds, for instance, have been stepping up their lobbying effort in recent years. The private equity industry also recently organized its own lobby effort with the formation late last year of the Private Equity Council, whose members include Blackstone, KKR and TPG.

The tax issue is the latest sign of the increasingly hostile attitude facing the private equity industry - not just in the United States but across the Atlantic as well.

German officials have likened private equity players to "locusts," and in the U.K., the center for private equity in Europe, the Treasury has launched a review of private equity deals.

On Capitol Hill, Representative Barney Frank (D-MA), chairman of the House Financial Services Committee, plans to hold hearings on private equity, which could spark regulatory initiatives.

While public animosity may be rising, once people realize what an important role private equity plays in the economy, cries for regulation are likely to fade, Profusek from Jones Day said.

Private equity has helped the global economy hum along. Last year, buyout firms accounted for one-fifth of the record $3.8 trillion in deal activity, according to Thomson Financial.

"I think people will realize there isn't really a problem here. Most private equity firms aren't slash and burn guys - they're more about buying and building. They aren't like Gordon Gekko," Profusek said, referring to the fictional character from the movie "Wall Street" who became a symbol of the greed of corporate raiders in the 1980s.

Attempts to regulate private pools of capital in the past haven't had much success. Hedge funds fought Securities and Exchange Commission rules requiring them to register as investment advisers. Those rules went into effect in February of last year but then were quickly struck down by a federal appeals court.

What's more, there already is a growing sense that U.S. financial markets are over regulated. A group of financial luminaries gathering in Washington earlier this month said changes in the regulatory framework were critical in order to keep U.S. markets competitive with the rest of the world. (Full story)

Nonetheless, private equity has become such a big part of the economy that it's only a matter of time before there's more of an effort to put controls on it, said Dan Finkelman, a partner at law firm Proskauer Rose who focuses on private equity.

"With the kinds of acquisitions private equity is capable of making, it's inevitable that one or more investments are going to be highly publicized when they crash - and that's when regulators tend to get involved," he said.

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